Introduction

Indian companies, typically, raise funds internationally through the issuance of depository receipts listed on foreign exchanges, by inviting non-residents to subscribe to offerings made within India, or through overseas borrowing.  Our previous article on external commercial borrowings explored the significant role of debt-driven capital flows in this context.  In this article, we will shift our focus to overseas funding by Indian companies through the listing of their shares on international stock exchanges.

As capital markets become more global, companies now have more alternatives to raise money beyond their home countries.  For Indian companies, listing shares on foreign stock exchanges is another way to reach international investors, increase their global presence, and take advantage of new growth opportunities.  The direct listing of shares in foreign jurisdictions allows Indian companies to access global capital beyond domestic exchanges.  This enables Indian companies to achieve better valuations in line with the global standards and boost foreign investment flows.

Traditionally, Indian companies were allowed to list securities in a foreign market indirectly through Depository Receipts (‘DRs’) like American Depository Receipts (ADR) and Global Depository Receipts (GDR).  DRs are negotiable certificates issued by a bank evidencing publicly traded shares of a foreign company.  However, listing through ADR and GDR has declined sharply.

Recent Development

As a step towards enabling Indian companies to access global capital markets, in 2020, the Ministry of Corporate Affairs (‘MCA’) made a significant development in this aspect by amending section 23 of the Companies Act, 2013 (‘CA 2013’).  The provisions related to listing of equity shares on permitted stock exchanges in permissible foreign jurisdictions were inserted through this amendment.

The amendment was certainly a breakthrough, however, there was still a lack of clear framework or regulations for listing these securities on permitted stock exchanges.  Therefore, on 24 January 2024, the MCA laid down the procedural law via Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 (‘LEAP Rules’).  Simultaneously, the Ministry of Finance amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘NDI Rules’) wherein a new chapter and a new schedule i.e., Chapter X (Investment by Permissible Holder in Equity Shares of Public Companies Incorporated in India and Listed on International Exchanges) and Schedule XI (Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme) have been incorporated in the NDI Rules (‘Direct Listing Scheme’).

While the LEAP Rules provide for conditions and requirement of filing the prospectus with the Registrar of Companies, the Direct Listing Scheme prescribed the framework for issuance and listing on international exchanges and conditions for investments from a foreign exchange perspective. 

In this article we will delve into the regulatory framework for listing of equity shares on permissible exchanges.

Regulatory Framework

Permissible Exchanges and Jurisdiction

The LEAP Rules and the Direct Listing Scheme allow unlisted public companies and the listed companies to list their equity shares directly on the following two international exchanges (‘International Exchanges’) (i) India International Exchange; and (ii) NSE International Exchange in Gujarat International Finance Tec-City – International Financial Services Centre in India (‘GIFT-IFSC’).  Currently, listed companies are unable to list their equity shares on the International Exchanges as the Securities and Exchange Board of India (‘SEBI’) has not yet released the operational guidelines for the listed Indian companies.

The listing of shares on the International Exchanges will be governed by the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021.

Eligibility

Rule 3 of the LEAP Rules permits both unlisted public companies and listed companies to issue their securities for the purposes of listing on permitted stock exchanges (i.e., International Exchanges) in permissible jurisdictions (i.e., GIFT-IFSC).  The LEAP Rules provides the eligibility criteria for unlisted public companies and the procedural details concerning the timeline and format for filing the prospectus, as well as adherence to Indian Accounting Standards after listing.  For existing listed entities, the LEAP Rules provide that such entity will need to adhere to regulations as will be framed by SEBI or IFSCA in this regard.  

Rule 5 of the LEAP Rules further specifies negative list of companies which are not eligible to list their equity shares on the International Exchanges:

a) a company registered under Section 8 (company with charitable objects) of the CA 2013 or declared as a Nidhi company under Section 406 of the CA 2013;

b) a company limited by guarantee and also having share capital;

c) a company that has any outstanding deposits accepted from the public as per Chapter V of the CA 2013 and rules made thereunder;

d) a company having negative net worth;

e) a company which has defaulted in payment to any bank or public financial institution or non-convertible debenture holder or any other secured creditor;

f) a company which has made any application for winding-up under the CA 2013 or for resolution or winding-up under the Insolvency and Bankruptcy Code, 2016 and in case any proceedings against the company for winding-up under the CA 2013 or for resolution or winding-up under the Insolvency and Bankruptcy Code, 2016 is pending

g) a company which has defaulted in filing of an annual return or financial statement under Section 92 or Section 137 of the CA 2013.

Further, the para 3 of Schedule XI to the NDI Rules provides the eligibility criteria for direct listing for issuance of equity shares on International Exchanges and offer of shares by existing shareholders subject to the compliance with the following conditions and other requirements as laid down:

a) the public Indian company, any of its promoters, promoter group, directors or selling shareholders are not debarred from accessing the capital market by the appropriate regulator;

b) none of the promoters or directors of the public Indian company is a promoter or director of any other Indian company which is debarred from accessing the capital market by the appropriate regulator;

c) the public Indian company or any of its promoters or directors is not a willful defaulter;

d) the public Indian company is not under inspection or investigation under the provisions of the CA 2013;

e) none of its promoters or directors are fugitive economic offender.

Further, in terms of para 1 of Schedule XI to the NDI Rules, any issue or offer of equity shares by the public Indian companies will be subject to prohibited activities, and sectoral caps prescribed in paragraph 2 and 3 of Schedule I to the NDI Rules and such equity shares to be issued by the public Indian company or offered by its existing shareholders on the International Exchanges shall be in dematerialised form and will rank pari passu with equity shares listed on a recognised stock exchange in India.

Pricing

In terms of para 6 of Schedule XI to the NDI Rules, the listed companies are required to issue their equity shares directly on International Exchanges at a price not less than the price applicable to a corresponding issuance of such equity shares, to domestic investors under the applicable laws.

On the other hand, the price of initial listing of equity shares by unlisted public companies shall be determined by book-building method.  Additionally, the unlisted public companies are required to ensure that the price of initial listing is not less than the fair market value under the applicable laws.

Permissible Holder

Any person or entity, not being a resident of India, can become a permissible holder i.e., they can purchase, sell or become a beneficial owner of equity shares of an Indian company listed on International Exchanges.  However, if such a person is a citizen of a country or an entity incorporated in a country, which shares land border with India, they are required to take prior approval of Indian government.   

Voting rights

The public Indian companies having their equity shares listed on International Exchanges are required to ensure that the voting rights on such equity shares shall be exercised directly by the permissible holder or through their custodian.

Other notable developments

In furtherance of the LEAP Rules and Direct Listing Scheme, the Reserve Bank of India has further carried out necessary amendments in the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 and the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) (Amendment) Regulations, 2015.  The amendments provide for the mode of payment and the remittance of sale proceeds on purchase or subscription of equity shares of an Indian company listed on an International Exchange. The amendment further provides that the funds raised through the direct listing will be kept in foreign currency accounts held with banks located outside India pending utilisation.

The IFSCA has also amended the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 in order to update the regulations in line with the Direct Listing Scheme.

Conclusion

The direct listing of equity shares in the International Exchange is groundbreaking progress as it will aid Indian companies in having better growth opportunities.  It will allow public Indian companies to tap into global market beyond domestic exchanges.  The Indian companies will have the flexibility to access both the domestic market for raising capital in INR and the international market for raising capital in foreign currency.

The Direct Listing Scheme will be beneficial not only for Indian companies but for the investors as well. It allows foreign investors to engage directly with Indian companies, providing opportunities for high returns on investments.  The transactions on International Exchange will be conducted in foreign currencies, eliminating currency exchange risks.  Additionally, the International Exchanges have extended trading hours (over 20 hours a day) catering to investors of all significant jurisdictions in the world thereby enhancing convenience and accessibility.  The tax incentives such as exemption of capital gains arising out of transfer of equity shares of Indian companies in GIFT-IFSC make this an attractive option for global investors seeking to capitalize on the growth potential of Indian companies.

Further, it would also be interesting to note how effectively the IFSCA and SEBI collaborate in sharing information and ensuring adherence to the laws of their respective jurisdictions, in accordance with the International Organisation of Securities Commissions Multilateral MoU. Nevertheless, ongoing cooperation, information exchange, and coordination between the IFSCA and SEBI will be necessary for the regulation of dually listed companies in both jurisdictions.

Written By Nidhi Arora (Partner) and Drishey Chugh (Associate)